When selling assets under section 363 of the Bankruptcy Code or pursuant to a plan, debtors typically conduct auctions, selecting the highest or best bidder as the purchaser. Section 363 auctions are intended to enable debtors to maximize the value of their assets, while ensuring "finality and integrity in the process . . . ."1
These considerations of maximizing value and ensuring finality may conflict when a losing bidder objects to approval of an auction winner, asserting that its bid is higher or better and alleging flaws in the auction process. While a higher, post-auction bid may provide more value to the bankruptcy estate, it can also "in the long term undermine confidence in judicial sales and discourage prospective purchasers from making their best offers in a timely manner."2 This article considers two recent unpublished bench decisions from Judge James M. Peck of the United States Bankruptcy Court for the Southern District of New York, in which Judge Peck refused to order the reopening of auction proceedings to allow for new bids. This article compares those decisions with an unpublished bench decision from Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware, in which Judge Carey agreed to recommence bidding based on his determination that it would result in increased value to the estate. A likely critical distinction between the cases was that the objecting parties in Judge Peck's courtroom attempted to make new offers they failed to make during the auction itself. By contrast, Judge Carey reopened the bidding process after the debtors rejected a seemingly higher or better offer made during the initial auction and the unsuccessful bidder sought to continue bidding on the debtors' assets.
Section 363 allows a chapter 11 debtor to sell assets outside the ordinary course of the debtor's business, free and clear of existing liens, claims and encumbrances,3 so long as the debtor demonstrates a good "business reason" for the sale.4 Under sections 1123 and 1129 of the Bankruptcy Code, a chapter 11 debtor may likewise sell its assets free and clear of existing liens pursuant to a plan of reorganization.5 Although not required, this sale process may occur through a public auction.6 The auction process is typically governed by court-approved bidding procedures, which regulate the solicitation of purchasers, the selection of qualified bids, and the conduct of the auction.7 As with any sale of assets outside the ordinary course of business, if a debtor holds an auction and selects a winning bid, the debtor must obtain bankruptcy court approval of the sale and demonstrate that the selected bid represents the highest or best offer.8 Bankruptcy courts will generally defer to a debtor's decision regarding the highest or best offer unless the decision is inconsistent with sound business judgment.9 A losing bidder generally lacks standing to object to a sale.10
In the face of an objection to a proposed sale, bankruptcy courts have historically been reluctant to reopen bidding when an unsuccessful bidder or other third party attempts to submit a higher or allegedly better offer for the debtor's assets after the auction has closed in accordance with court-approved procedures.11 This reluctance springs from courts' typical desire to preserve the finality and integrity of the court-approved bidding procedures, which ensures "that nothing impair[s] public confidence in the regularity of judicial sales."12
While finality and integrity is of critical importance, "[t]he governing principle at a [sale] confirmation proceeding is the securing of the highest price for the bankruptcy estate."13 Therefore, bankruptcy courts have broad discretion to amend the auction procedures to balance "the competing considerations of finality in the bidding process and fairness to the bidders against the interests of creditors in securing the highest sales price."14 In the three cases discussed in this article, courts sought to strike a balance between finality and maximizing value for the estate.
Finlay Enterprises, Inc.
In In re Finlay Enterprises, Inc.,15 the debtors held an auction pursuant to bidding procedures approved by Judge Peck.16 At the auction, Synergies Corp. successfully bid $555,000 on a portion of the debtors' intellectual property. After the debtors filed a notice of the successful bids, Zale Corporation objected, asserting that (i) the debtors did not comply with the established bidding procedures; (ii) the auction never officially closed; (iii) after the debtors adjourned the auction, Zale submitted two bids greater than Synergies' winning bid; and (iv) Zale was prepared to submit a revised bid that was $200,000 more than the Synergies' winning bid.17 In response, the debtors contended that they fully complied with the bidding procedures and that Synergies outbid Zale, which elected to stop bidding.18 The debtors added, however, that although the auction had concluded, Zale's most recent bid was significantly higher than Synergies' bid, and the debtors would be open to considering Zale's bid so long as Synergies was given a chance to submit further bids.19
In addition, on the date of the hearing on the debtors' motion to approve the sale, Windsor Jewelers, Inc. filed a limited objection to the debtors' notice of successful bids, arguing that, before its representative left the auction, it submitted a higher or better bid on an asset that was subsequently sold to another bidder and that it would have been willing to bid significantly more on that asset if it were given the chance.20
At the hearing, Judge Peck stressed that the scope of his review of the auction was limited to whether the parties violated court-approved bidding procedures, stating that "the only reason that I should be dealing with this [objection] is if there is a legitimate concern that there has been a violation of a court order. Only then does this dispute really rise to the level of judicial intervention."21 Although Judge Peck agreed to consider the potential value that Zale's subsequent bid would bring to the estate, he noted that additional value "will not be what guides my review."22 Rather, Judge Peck focused his analysis on whether "there has or has not been a material deviation from the auction procedures that somehow prejudice[s Zale]."23
Judge Peck emphasized that finality is of central importance to bankruptcy estate auctions. Specifically, he stated that "the only way that auctions of assets can be conducted fairly, not only in the Finlay Enterprises' bankruptcy but in every other case, is if the parties who participated [at] the auction recognize that it really matters whether they choose to bid or not to bid . . . ."24 In addition, Judge Peck found that "disgruntled" bidders, such as Zale, "ordinarily . . . do not have standing to be heard at a hearing such as this,"25 and determined that Windsor and any other party who joined in objecting to the auction "in a me too fashion" had no standing.26 Approximately two weeks later, on November 25, 2009, Judge Peck entered an order approving, inter alia, the sale to Synergies and overruling any remaining objections to the sale, including the objections by Zale and Windsor.27
Extended Stay Inc.
Judge Peck returned to the theme of the paramount importance of finality in bankruptcy auctions at the hearing approving the sale in In re Extended Stay Inc.28 In Extended Stay, the debtors selected Centerbridge Partners, L.P. and Paulson & Co. Inc.-who were joined by Blackstone Real Estate Partners VI L.P. later in the auction process-(the "C/P/B Investors") as stalking horse bidders, and agreed to conduct an open auction, in accordance with court-approved bidding procedures, through which third parties could make higher or better offers.
The auction took place on May 27, 2010, and for nearly 19 hours, two bidders, the C/P/B Investors and affiliates of Starwood Capital Group Global, L.P., vied to become the debtors' plan sponsor. After the C/P/B Investors submitted a high bid of $3.925 billion, the CEO of Starwood withdrew from the auction, stating: "We are done, thank you very much, congratulations. Good luck to you."29
Two weeks after the auction's conclusion, Starwood objected to the debtors' motion to approve the sale to the C/P/B Investors, arguing that improper deviations from the court-approved bidding procedures denied Starwood the opportunity to make a higher or better offer during the auction.30 Specifically, Starwood argued that, in contravention of the bidding procedures, the special servicer and operating advisor for the Debtors' prepetition senior secured debt required only cash bids.31 Starwood asserted that this chilled bidding, resulting in a winning bid that did not maximize value for the debtors' estates.32 As a result, Starwood never made its best offer.33 The debtors, the C/P/B Investors, and other parties in interest characterized Starwood's objection as a case of "non-buyer's remorse"34 and an attempt to undermine an auction that complied with all ordered procedures in which Starwood voluntarily and without objection participated, and from which it finally withdrew, without objection.35
At the June 17, 2010 hearing on the debtors' motion to approve the sale, Starwood unsuccessfully attempted to convince Judge Peck to reopen the bidding. At the beginning of the hearing, Judge Peck noted that while he would be open-minded with respect to "credible assertions . . . that there was a deviation from the bid procedures," he was "very unsympathetic to the last minute pirating of this process."36 In an exchange with Starwood's counsel, Judge Peck dismissed Starwood's complaints, stating: "You were not limited in any way, you participated voluntarily in an auction and now you're complaining about it. . . . You accepted the rules, you participated pursuant to the rules. And with all the creativity available to you[,] you could have come up with a bid that was the highest and best bid."37 Starwood ultimately withdrew its challenge to the auction procedures, and the court approved the debtors' sale to the C/P/B Investors.38
Foamex International, Inc.
In contrast to Judge Peck's focus on the need for finality in auctions, Judge Carey, in In re Foamex International, Inc.,39 demonstrated a willingness to consider the potential additional value to the estate in determining whether to reopen an auction for continued bidding. In Foamex, the debtors conducted an auction pursuant to court-approved bidding procedures to sell substantially all of their assets and selected Wayzata Capital Investment Partners LLC's $141.5 million all-cash bid as the winning bid.40 Wayzata's bid, however, was $5 million lower than the $146.5 million all-cash bid of the stalking horse bidder, MP Foam DIP LLC, an affiliate of first lien lenders MatlinPatterson Global Opportunities Partners III L.P. and MatlinPatterson Global Opportunities Partners (Cayman) III L.P.
The Matlin group made its all-cash bid subject to the condition that if the auction continued past the current round and the Matlin group made a subsequent bid, the debtors would permit the first lien agent, at the Matlin group's direction and request, to credit bid the entire first lien debt. The Matlin group and the majority of the first lien lenders objected to the debtors' motion to approve the Wayzata purchase, arguing that the debtors violated the bidding procedures order by selecting an inferior bid, and violated section 363(k) of the Bankruptcy Code by denying the first lien agent the right to credit bid at the auction.41
During the May 21, 2009 hearing on the debtors' motion to approve the sale to Wayzata, Judge Carey stated that although he believed the debtors complied with the bidding procedures, the debtors should have accepted the Matlin group's bid as the highest or best offer.42 Judge Carey was "convinced, based upon what has occurred, that there may be more value to be had for the estate . . . ."43 Judge Carey therefore denied the debtors' motion to approve the sale, and ordered that the auction resume and that the debtors allow the first lien agent to credit bid pursuant to section 363(k) of the Bankruptcy Code during the resumed auction proceedings.44
The auction resumed on May 21, 2009, and the debtors selected the first lien agent's credit bid for $155 million, made at the Matlin group's direction, as the winning bid.45 On May 26, 2009, Wayzata objected to the selection of this bid and indicated that it was willing to increase its all-cash bid at a reopened auction.46 However, at the subsequent hearing to approve the sale to the first lien agent on May 26, 2009, Judge Carey was not convinced "that another round [of bidding] would be of any use."47 Thus, Judge Carey found that the first lien agent's bid was the highest or best bid and that it adequately reflected the value of the estate.48
As detailed above, courts grapple with the balance between finality and maximizing value in sales of estate assets. The Finlay, Extended Stay, and Foamex cases demonstrate differing approaches to this balancing act. Judge Peck in Finlay and Extended Stay approached the tension between finality and value maximization with a view towards finality, emphasizing that his paramount focus in reviewing the auction proceedings was whether the bidding procedures that he approved were in fact violated.49 Indeed, during the Finlay hearing, Judge Peck affirmed this position, stating that "if money trumped principles[,] bidding procedures would never mean anything."50 Accordingly, because the objecting parties in Finlay and Extended Stay were unable to demonstrate a violation of the bidding procedures that prejudiced their ability to submit higher or better offers, Judge Peck was unwilling to reopen the auctions-even if it could have increased value to the estate.
In contrast to Judge Peck's approach, Judge Carey reopened the auction in Foamex, even though the debtors had followed the court-approved bidding procedures. Although Judge Carey placed great importance on value, he was also cognizant of the need for finality, and refused to reopen the auction proceedings a second time when the losing bidder stated at the second hearing that it would be willing to submit an offer higher than its last auction bid.
The circumstances of the Foamex auction, however, differed from those present in Finlay and Extended Stay. In Foamex, the objecting and unsuccessful bidder had actually asserted what was arguably a higher or better bid before the conclusion of the auction. Thus, Judge Carey was able to reopen the auction and ensure that the debtors selected a bid yielding more value to the estate, while preserving the finality of the auction process.
Had Judge Peck faced a similar situation in Finlay or Extended Stay, he may not have so easily dismissed the objections. Indeed, Judge Peck in Finlay emphasized that "the only way that auctions of assets can be conducted fairly . . . is if the parties who participated [at] the auction recognize that it really matters whether they choose to bid or not to bid . . . ."51
Bidders are well-advised to make their higher or better offers during the auction process in order to object effectively to the auction's results, regardless of any seeming variations from the procedures. If the debtor then selects an offer the bidder believes is lower or less desirable than its last offer, the bidder will be best positioned to dispute the results before the bankruptcy judge and appeal to the interest of maximizing value to the bankruptcy estate.